Monday, June 09, 2008

Hedging

One of the many financial terms which have been creeping into our daily lexiconis hedging. While it sounds impossibly arcane, no thanks to the dark reputations that hedge funds have acquired of late, hedging is actually a simple strategy of reducing risk by taking protective, and sometimes painful, measures against our life utility. In finance-speak, hedging must involve taking opposite positions in various products which are correlated. So if we have to talk about hedging, we must have a common platform--utility, which is not a problem since our singular objective on earth is to maximize our utility, according to economists.

For example, paying life insurance premiums is a type of hedge for human capital in the event of death. Wearing seat belts is a matter of hedging comfort for safety. Socialise with a wider network of people. Do not over-commit in a relationship. Never burn your career bridges. All these social rules have their roots in hedging. If you look hard enough, hedging is something ordinary folks--those of the more conservative types anyway--have been practicing all their life.

And it is not unwise to do so. To take an opposite stance from hedging is to go all-in with guns a-blazing, with the all too familiar result of burning out way before your prime.

"This too will pass" is a philosophical hedge against the extremities of the human condition. Whether you be mired in the throes of despair or be lost in the joys of happiness, be awaiting death as a hangman or be sitting on a pile of capitalist gold, be in the company of or be grieving for your loved ones, the simple realisation that the human condition is essentially transitory tempers all sadness and happiness. Congratulations. You are now a Stoic.

I too have been hedging all my life. France vs Romania is those types of matches which I will bet draw, for fear of suffering the double whammy of France dropping points and losing money at the same time. I would much prefer to lose a small amount of cash and see my favourite teams triumph. Obviously the more important the match features in my heart, the larger the hedge needs to be against potential disappointment. I hedged a considerable sum against Manchester United winning the 2007-2008 Champions League, but actually forgot to cover penalty shootouts. Such is life.

And for all the broken-hearted in the world, it's time to learn how to hedge your pain away. Channel your negative energies into activities of the more productive types--the more utility they earn for you, the better. It's easier said than done, but get that first dose of utility in, and savour the soothing effects of utility on your broken heart. So stop spinning songs of nostalgia and start unravelling the secrets of the universe. Or start a veritable porn collection, if you so wish.

P.S. The idea of hedging is not new. The average German would pay 80 euros to win Euro2008, while the French, averse to such displays of patriotism as usual, would only offer 13 euro.http://www.lloyds.com/CmsPhoenix/DowJonesArticle.aspx?id=391960